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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Basic terms of trust law as applied to CGT: sub-fund settlements: introduction


The existence of sub-funds within a settlement, in particular where some of theproperty of the settlement is vested in certain individuals who are only trustees of thesub-fund, and other assets are vested in other individuals, has caused variousdifficulties, because up to 5 April 2006 the trustees of the settlement were alwaysregarded as one body of persons for CGT. Since then the trustees of the settlement havebeen deemed to be one person for Income Tax and CGT. So for example:

  • from the start of self-assessment all the chargeable gains of the settlement have had to be shown on one return, although there might be two or more returns for Income Tax up to 6 April 2006,
  • even before self-assessment there should have been one single assessment to CGT in which any of the trustees could be assessed, see for example Roome v Edwards, 54TC359,
  • the share identification rules applied to the settlement as a whole and not to blocks of shares held on particular trusts and
  • allowable losses belonged to the settlement as a whole.

From 6 April 2006 trustees of a settlement can elect for a fund or other specifiedportion of settled property to be treated as a separate settlement. This is known as a‘sub-fund’ or ‘sub- fund settlement’ and the original is known as the‘principal settlement’. The individual trustees of the sub-fund are treated asthe trustees of that settlement only and not of the principal settlement unless, as amatter of fact, they are trustees of both. Similarly, the individual trustees of theprincipal settlement are treated as trustees of that settlement only and not of sub-fund,unless they are trustees of both. See paragraph 18.

TSEM3500+ explains the conditions which must apply to enable an election to be made.

TSEM3520+ deals with the mandatory election form, SFE1, and the details that are required.This form is available on line.

The election cannot be revoked, see TCGA92/SCH4Z, paragraph 13.